Nostalgia versus the tangible now! BOC indicates prime rate at 3% very soon!

Posted on Posted in Market Commentary
Nostalgia like our memories are more likely to be shaped by the more pleasant aspects of reminiscing.
Take for example the recession of the early 90’s. The economy truly shuddered, interest rates were north of 10%, unemployment rose 40% to > 12%. Home prices plunge by nearly 50% over a 3 to 4 year period. The pending question remains could these circumstances be repeated as our American cousins discovered in 2009?
Despite this domestic calamity of the early 90`s most of us managed to hold fast and sail through the squall.  The general sentiment that our innate Canadian frugality combined with our conservative, hardworking ethos helped carry the day. This maybe partially true but it is far more likely that a regime change
south of the border optimised the federal reserve’s progressive measures. The mimicked domestic Fiscal policy of the BOC also assisted hugely to mitigate our economic swoon.
How can this time be any different? It is naturally presumed that our Government will always have the financial & intellectual means to step forward.  Many in the know will refer you to look at the actions of finance minister Jim Flaherty in 2009, who boldly opened all our monetary spigots and bought all the outstanding CMHC mortgages from the big 5 banks. He subsequently initiated or encouraged that these same lenders create 35/40 year terms and other ultra liberal lending criteria to super charge us through the 2009/10 &11 housing debacle.  Subsequently being essentially debt free, the Banks recorded unprecedented profits for the next 9 or 10 years. Ironically the average home owner & reliable taxpayer will face the brunt of the blow-back from these hastily conceived radical financial steps which are now belatedly perched on our doorsteps.
What If the Bank of Canada raises it`s prime rate as advertised to that 3% neutral range. What will be the immediate consequences?
Certainly things have changed from 25 years ago; Homes then averaged $255,020 , combined incomes were then a solid $51,300, gas prices per litre were $59.2 cents. and H.E.L.O.C`s were almost non existent.  More poignantly a family could feasibly fill a grocery cart with a couple of hundred $`s.
How are things different today???    Keep in mind, that the average H.E.L.O.C is now > $100,000, Housing in the G.T.A now averages $825,000 per property. Fully detached homes in the G.T.A average $1.35 million. Keep in mind that even though personal debt levels have declined modestly over the last 6 months, they still hover near a record of 172 % on average.
Combine these preceding facts with the tangible reality that the average annual income of Canadians is now $33,814,with a combined household income of approx. $67,000.
Many North Americans intuitively believe in the prevailing dogma that Real estate prices are destined to perpetually march forward. If history is any barometer this sentiment is at a minimum a benign overstatement ! Like all Bull Markets there are bound to be lulls as there are extended peaks. The general numbers appear to be rather irrefutable, residential G.T.A home prices are pulling back.  How far and for how long remains that multi million $ question.
Keep in mind that inadequate (poor) International & national monetary policy is often the harbinger of pullbacks in the general economy.  Can this announced series of rate hikes be the cleaver that kills the Canadian Golden Goose?    Time will truly tell.
Meanwhile please review the insightful article by Robert Carrick, about what this forecasted rate hike will mean for your household in tangible $ & cents.
In case you have any questions, please do not hesitate to contact the experienced personnel at Accurate (Peel) Appraisals  & Heritage Caledon Realty.
If the average HELOC in the GTA is north of  $100,000 this new bank accounting measure will be a huge factor to those chronically indebted (15%) of home owners.

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